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The idea of rupee cost averaging is averaging out the price at which you purchase units of a mutual fund. The main factor of equity investments is market volatility, reflecting the unpredictability of the economy. The demand of law says that the commodity is purchased at a higher quantity when it is less expensive and when the price increases the demand reduces.
When the market is rough the rupee cost averaging works the best. It benefits the investors to purchase less when the markets are high-priced and more when it’s cheap. A Systematic Investment Plan (SIP) is an easy investment plan of doing this with the advantage of rupee cost averaging.
What Is The Rupee Cost Averaging In SIP?
The basic concept of the rupee cost averaging in a Systematic Investment Plan (SIP) is to make a profit through their investments. It is advised to investors to purchase the stocks when the market lows and sell them off when the market highs. Due to a lack of investment knowledge, many investors tend not to consider investing in mutual funds in a panic of the loss. Investors tend to purchase when the market is up and sell when the market is down.
The rupee cost averaging strategy helps you to take advantage of the market highs and lows that will benefit your investment. When investors set a particular amount of investment every month via mutual funds, they can average out the value per unit. The strategy also helps the investors to purchase more units when the market is low and vice versa. This process brings down the investors’ average cost for each unit. It requires the investors to invest in small portions over a period, which introduces the concept of SIP in mutual funds.
Let’s take an example, Richa invests INR 10,000 every month for an equity mutual fund in SIP. Considering the market is volatile for a few months, her investment will reflect in the below table:
The average Net Asset Value (NAV) by rupee cost averaging cost for each unit comes as low as INR 99.6 (INR 598/6). If Richa does not opt for SIP and chooses to invest a round sum amount then according to the NAV of January the number of units would be 600 (INR 60,000/INR 100).
Now, investment through the SIP method in six months will be in June (NAV is INR 100). If she invests through a round sum amount, the value would remain as it is at INR 60,000 ( calculation – 600 units multiplied by NAV of June). Furthermore, via the SIP method with the strategy of rupee cost averaging the value would look like INR 60,401 ( calculation – INR 604.01 multiplied by the NAV of June). This clearly shows that the SIP option has higher returns than the lump sum method.
The Features Of Rupee Cost Averaging
The concept of rupee cost averaging is relatively new but has gained popularity among smart investors. The strategy of rupee cost averaging is to make a profit from the market without any risks normally of the equity market.
Let us see the features of the rupee cost averaging:
The Cost Averaging
Averaging out the cost at which you obtain units of mutual funds is an idea behind rupee cost averaging. Irrespective of the mutual fund’s Net Asset Value (NAV), investors need to make a specific monthly investment in one or more schemes of mutual funds. In a volatile market, this will help the investors to control the overall cost.
Investment Complexity
The rupee cost averaging helps investors to reduce the complexity of the investment. By investing on a set calendar you will avoid the impossible task of attempting to determine the accurate optimum time to invest. The rupee cost averaging effect balances your unit expenses and equalizes them which lowers the effect on your assets due to market volatility.
Generate Wealth
The rupee cost averaging doesn’t really guarantee profit but helps to generate wealth and show how a methodical approach can be successful in the long run.
Advantages Of The Rupee Cost Averaging
The following are the benefits of the rupee cost averaging:
The Average Purchase Price Drops
When investors invest a round sum amount in a mutual fund, they do not get the chance to average out the investment. In this case, the average price remains equal to the purchase price. In the rupee cost averaging approach, the investment gets to expand. Additionally, as you purchase more units when the NAV is low-priced, the average price of a unit reduces.
Saves The Capital From Market Volatility
The options traders are seasonal investors; they make volatility their best buddy – the highest the volatility, the larger the profits. Whereas, in a single trading sitting, the high volatility can wipe out the capital of the small investors. The strategy protects the investors from market volatility and saves their principal amount.
Affordable Investment Amount
Generally, the minimum SIP investment starts at INR 500 per month. The risks are minimal so try and invest more. Before investing a higher amount analyze and monitor the growth of the stocks to get an idea of the market. With rupee cost averaging investors can invest less and can get higher-end returns.
Hedging Use
The concept of rupee cost averaging can be used for hedging by some investors. The investors divide the total investment into two equal parts and invest the first half in equity SIP(s) and the second half in debt SIP(s). The hedging plan ensures that the NFV never drops below the actual amount. Investors can consult a professional money manager to help them choose the right investing amount for each SIP.
Disadvantages Of The Rupee Cost Averaging
Regardless of the great benefits, there are two drawbacks of the rupee cost averaging:
- The rupee cost averaging brings discipline, Yes! but the amount remains the same irrespective of the market status.
- The exit load of the rupee cost averaging can make you take a step back. The mutual fund houses normally levy an exit load on the withdrawal of your investment. Investors need to pay the exit load for the previous year’s investment amount.
How Does The Rupee Cost Averaging Work?
The market is more unpredictable than before. The rupee cost averaging is a fast-gaining ground market. Investors should start investing early to get a secure financial future. The rupee cost averaging is the best approach towards the investment.
The rupee cost averaging helps the investors to maximize the returns on their assets and allows them to balance out their cost of investment by buying during both falling and rising markets. It adds additional units with the same amount of investment in times when the market is collapsing.
The rupee cost averaging method eliminates the hassle of keeping an eye on the market on a daily basis and provides the benefit of stable investment. It keeps the investors at peace without the trouble and panic of market volatility. The strategy of rupee cost averaging is a chance for money growth that suits all kinds of investors from beginners to smart investors.
Bottom Line
Investment in SIP with the rupee cost averaging method boosts both psychological and financial discipline within the investor. It helps them to automate the complete procedure and minimizes speculations on the market’s ups and downs and the constant need to understand when to invest. The returns are higher when you invest early and for the long term and are so much better as they are achieved with minimal effort and a lot more discipline.
Frequently Asked Questions (FAQs)
What are the restrictions of rupee cost averaging?
The limitations of the rupee cost averaging are:
- The rupee cost averaging is a strategy for buying and not selling.
- The break between each purchase is not specified.
- The method finds its proper application when the stocks and the markets work in a cyclical manner. For example, if the stocks only appear a downward trend then the rupee cost averaging will bring no gains to the investors.